NAHB Housing Market Index and the S&P 500: 79% Correlation

I am not looking for the housing market to suddenly turn back up on a dime. Too much inventory to work through. Some of that inventory will drop off as sellers cancel their listings (or they expire) as they were unable to sell at prices that are no longer available. These are the ones who didn't have to sell, didn't have to move, didn't have a bad mortgage to refinance, but were willing to sell at inflated prices and didn't pull it off.

The chart below is rather intriguing - the NAHB homebuilders index leads the S&P 500 by 12 months and with a near-80% correlation - a correlation that over time has actually strengthened, owing to the growing influence that the real estate market has exerted on the overall economic and financial landscape over the past five years. In fact, we can trace almost two-percentage points of the 3 1/2% average annual rate in real GDP over that time frame to the boom in housing construction and home prices - the direct impact on homebuilding, the spin-offs to other sectors like real estate services, architecture, engineering, legal, etc and the multiplier impact from the 'wealth effect' on consumer spending, especially on home improvements and household furnishings.

Now, if you go to the period from 1985 to 1986, there is no correlation between the housing market and the stock market. So, bulls can ignore the above chart if they like, saying that the association is a recent thing. But given other indicators of a slowing economy (the yield curve which is becoming more inverted each week, leading economic indicators, etc., all of which I have written about at length in previous issues), I think it is something we should pay attention to. As Rosenberg notes, the correlation is becoming more pronounced with time, as US economic growth depends more and more on housing.

Wcw adds a bit more to this today: When charts go bad

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